All the questions are in the document. I need help with requirement 1, 2, 3, 4, 5.

TAX ALLOCATION - THE BASIC CONCEPT Accounting Standards Codification (ASC) topic 740 (formerly SFAS No 109, paragraphs 10 & 11), indicates that income taxes currently payable for a particular year usually include the tax consequences of most events that are recognized in the financial statements (F/S) for that year. However, because tax laws and financial accounting standards (may) differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains, and losses, differences (may) arise between - 1 - the amount of taxable income (tax return or T/R) and pretax financial income (book income) for the year 2 - the tax basis (i.e., tax book value) and their reported amounts (i.e., book value) on the F/S A difference between the tax basis (i.e., NBV for the T/R) of an asset or liability and its reported amounts (i.e., NBV for the F/S) on the B/S will result in taxable or deductible amounts in future years. THE BASIC ILLUSTRATION To illustrate, NOVA Corporation acquired depreciable equipment with a useful life of 5 years for $360,000. NOVA established a zero salvage value, uses straight line depreciation for book purposes (i.e., for their F/S), and uses accelerated depreciation for tax purposes (i.e., for their T/R). The following table shows the difference between the amount of depreciation expense for NOVA's T/R compared to the amount deducted on their I/S Table #1 Tax Return Versus Book Depreciation Expense 20X1 20X2 20X3 20X4 Accelerated 116,66 93,345 70,00 46,67 Depreciation 7 0 3 Straight Line 72,000 72,000 72,00 72,00 Depreciation 0 0 Difference 5> 7 20X5 33,31 5 72,00 0 38,68 5 Another way of viewing the \"temporary difference\" between the differing tax return versus book depreciation amount is to concentrate on the Balance Sheet (B/S) differences (rather than I/S differences in the above table). The B/S approach technically is the correct approach - although the I/S approach may be easier to understand. Depreciation schedules showing B/S net asset values for tax and book purposes are found in the tables below - Table #2 - Tax Return B/S Values 20X1 Net Book Value - 360,00 beginning 0 Depreciation Expense 116,66 7 Net Book Value - ending 243,33 3 20X2 243,33 3 93,345 20X3 149,98 8 70,000 149,98 8 79,988 20X4 79,98 8 46,67 3 33,31 5 20X5 33,31 5 33,31 5 -0- Table #3 - Financial Statement B/S Values 20X1 20X2 20X3 Net Book Value - 360,00 288,00 216,00 beginning 0 0 0 Depreciation Expense 72,000 72,000 72,000 20X4 144,00 0 72,000 Net Book Value - ending 72,000 288,00 0 216,00 0 144,00 0 20X5 72,00 0 72,00 0 -0- The resulting differences between Tax Basis and Book Basis are as follows - Table #4 - B/S Value Differences Between Tax 20X1 20X2 NBV - T/R - Table #2 243,33 149,98 3 8 NBV - F/S - Table #3 288,00 216,00 0 0 year end differences 2> or decrease in 5> Return and F/S 20X3 20X4 79,988 33,315 144,00 0 2,000 20X5 -0- 72,000 -0- 25,327 -038,68 5 The \"increase differences\" are deductible amounts for tax purposes in 20X1 and 20X2. The depreciation expense deductible on the 20X1 tax return is $116,667, which is $44,667 GREATER than the $72,000 depreciation expense deducted on the books for 20X1. Similarly the $93,345 tax return depreciation deductible for 20X2 is $21,345 GREATER than the $72,000 depreciation expense deducted on the books for 20X2. For years 20X3, 20X4, and 20X5 these temporary differences \"reverse\". For those three years the depreciation deductible on the tax return will be LESS than the book depreciation expense. For example, the $2,000 decrease in the difference between tax basis and book basis in 20X3 is due to the difference between the $70,000 depreciation on the tax return and the $72,000 depreciation deducted on the books for 20X3. Notice that the temporary depreciation differences have completely reversed by the end of year 20X5 (recall the equipment had a 5 year life!), when both the tax basis and book basis of the asset has reached -0-. The total depreciation expense for the five years is $360,000 for both the tax return and for the books. However, the year to date differences in the dollar amount of depreciation expense on the tax return versus the books must be accounted for properly under ASC #740. To illustrate Deferred Taxes, assume Book Income Before Taxes for the five years is as follows - 20X1 - $80,000 20X2 - $82,000 20X3 - $84,000 20X4 - $86,000 20X5 - $88,000 Total - 420,000 Let us also assume a constant tax rate of 33% for all five years. Using these amounts, book income versus taxable income and Income Tax Payable will be as follows - Table #5 - Calculation of Current Tax Liability 20X1 20X2 20X 20X4 20X5 3 Book Income 80,00 82,00 84,0 86,00 88,00 0 0 00 0 0 Depr diff - 45> 0 7 5 Taxable 35,33 60,65 86,0 111,3 126,6 Income 3 5 00 27 85 Inc Tax Pay 11,66 20,01 28,3 36,73 41,80 (33%) 0 6 80 8 6 Total 420,0 00 -0420,0 00 138,6 00 Income Tax Payable (amount paid the IRS each year) is simply taxable income multiplied by the tax rate. Note how the or decrease in book versus tax basis are derived - they are the year to year increases or decreases in the differences between the tax basis and book basis of the equipment - shown in Table 4. These amounts can also be derived from the annual differences in depreciation expense shown in Table 1. Under ASC 740 (formerly FASB #109), taxes to be paid on future taxable amounts are recognized as liabilities. The amount of the liability is the future taxable amount multiplied by the tax rate of that year. This liability is called Deferred Income Tax, or simply DIT. DIT (the B/S liability for future taxes) can now be computed as follows using the Basic data from Tables 2, 3, and 4, coupled with the tax rate of 33%. Table #6 - Calculation of Deferred Income Tax (DIT) 20X1 20X2 20X3 20X4 NBV - tax - table 2 243,33 149,98 79,988 33,315 3 8 NBV - books - table 288,00 216,00 144,00 72,000 3 0 0 0 Difference 2> 2> 5> Cumulative DIT x 4> 4> 6> Dec in DIT > 20X5 -0-0-0-012,76 6 Note that DIT becomes -0- when the future taxable amounts become -0-. Based upon amounts from Tables 5 and 6, the journal entries to record income taxes for each year can be determined. Note that under ASC 740 (formerly FASB #109), Income Tax Payable and Deferred Income Tax are \"directly calculated\" in the above tables. Income Tax Expense becomes the amount to balance the debits and credits. Table #7 - Resulting Correct Journal Entries 20X1 20X2 20X3 Income Tax 26,400 27,060 27,720 Expense DIT - Table 6 > Inc Tax Pay - Table 6> 0> debit / Book Inc Before Tax 80,000 82,000 84,000 effective tax rate 33.00% 33.00% 33.00% 20X4 28,380 20X5 29,040 8,358 12,766 86,000 33.00% 88,000 33.00% Note that the DIT is credited or debited to obtain the B/S amount needed (the cumulative DIT computed in Table 6). Note also that the effective tax rate (Inc Tax Exp / Book Income Before Tax) is equal to the statutory rate of 33%. To illustrate the importance of properly accounting for DITs, consider the effective tax rate computed in Table #8 below if the DITs were NOT recognized. Table #8 - Incorrect Journal 20X1 Inc Tax Pay - Table 11,66 5 0 DIT not recognized --Income Tax 11,66 Expense 0 Book Inc Before Tax 80,00 0 effective tax rate 14.58 % Entries 20X2 20X3 20X4 20,01 28,380 36,738 6 -----20,01 28,380 36,738 6 82,00 84,000 86,000 0 24.41 33.79 42.72 % % % 20X5 41,80 6 --41,80 6 88,00 0 47.51 % As seen in Table 8, the effective tax rate varies considerably from period to period, while using DITs had stabilized the effective tax rate. Therefore, using DITs, as required under ASC 740 (formerly FASB #109), provides a better matching of Book Income Before Taxes with the related Income Tax Expense. The results shown in Table 8 are NOT acceptable under GAAP. REQUIREMENT #1 Assume that on 1/1/x1 VSB Corporation acquired equipment which cost $750,000, with an estimated life of four (4) years and zero salvage. The following is taken from VSB's records - Depr Exp - T/R - accelerated Depr Exp - F/S - straight line Book Income Before Tax statutory tax rate 20X1 20X2 20X3 20X4 300,00 0 187,50 0 300,00 0 35% 220,50 0 187,50 0 310,00 0 35% 150,00 0 187,50 0 460,00 0 35% 79,500 187,50 0 660,00 0 35% 1) In the space below you are to record the income tax journal entry for each year. Show all of your calculations on a supporting EXCEL worksheet. 2) Identify all balance sheet accounts as current or non-current 20X1 20X2 20X3 20X4 debit credit REQUIREMENT #2 Use the information from the Basic Illustration EXCEPT that a new tax rate was enacted and changed in 20X4. Calculation of DIT NBV - T/R - Table 2 NBV - F/S - Table 3 depreciation difference tax rate cumulative DIT x tax rate or decrease in DIT 20X1 243,33 3 288,00 0 33% Calculation of Income Tax Payable 20X1 20X2 Book Inc Before 80,000 82,000 Tax depreciation diff 5> Taxable Income 35,333 60,655 tax rate Income Tax Payable 33% 11,660 33% 20,016 Journal entry (debit and ) 20X1 20X2 Income Tax 26,400 27,060 Expense DIT > Income Tax 6> Book Inc Before 80,000 82,000 Tax effective tax rate 33.00% 33.00% 20X2 149,98 8 216,00 0 33% 20X3 84,00 0 2,000 20X3 79,988 20X4 33,315 20X5 -0- 144,00 0 33% 660 72,000 -0- 37% 6,811 -0- 86,00 0 33% 28,38 0 20X4 86,00 0 25,32 7 111,3 27 37% 41,19 1 20X5 88,000 20X3 27,720 20X4 34,380 20X5 32,560 660 6,811 14,313 84,000 86,000 88,000 33.00% 39.98 % 37.00% 38,685 126,68 5 37% 46,873 37% -014,31 3 Total 420,00 0 -0420,00 0 148,12 0 In the space below, TYPE your explanation in words and a supporting calculation on WHY (i.e., what caused the effective rate in 20X4 to be 39.98% rather than 37%. Be sure your calculation shows how the 39.98% is determined - this does NOT mean your answer is \"you divide Income Tax Expense by Book Income Before Tax\". The \"issue\" to address is WHY this does not yield an answer of 37%, or even 33%. What makes it 39.98% in 20X4? REQUIREMENT #3 Use the information from the Basic Illustration EXCEPT that a permanent difference, municipal bond interest, has been added for three of the years. Municipal bond interest is income for book purposes, but NEVER for tax purposes. Thus, it is a PERMANENT difference. Calculation of DIT NBV - T/R - Table 2 NBV - F/S - Table 3 depreciation difference cumulative DIT x 33% or decrease in DIT 20X1 243,33 3 288,00 0 Calculation of Income Tax Payable 20X1 20X2 Book Income 80,000 82,000 Bond Interest Depreciation diff Taxable Income Income Tax Payable 15,333 -0 60,655 5,060 20,016 Journal entry (debit and ) 20X1 20X2 Income Tax 19,800 27,060 Expense DIT > Income Tax 6> Book Inc Before 80,000 82,000 Tax effective tax rate 24.75% 33.00% 20X2 149,98 8 216,00 0 20X3 79,988 20X4 33,315 20X5 -0- 144,00 0 660 72,000 -0- 8,358 -0- 20X3 84,00 0 2,000 20X4 86,000 20X5 Total 88,000 420,000 25,327 38,685 78,50 0 25,90 5 110,32 7 36,408 126,68 391,500 5 41,806 129,195 -0- -012,76 6 -0- 20X3 25,245 20X4 28,050 20X5 29,040 660 8,358 12,766 84,000 86,000 88,000 30.05% 32.61% 33.00% In the spaces provided on the next page you are to answer the following questions - 1 - WHY are the journal entry debits and credits to DIT exactly the same in Requirement #3 for all five years as they were in the Basic Illustration? Your answer must be 30 words or less! 2 - WHY is the Income Tax Payable amount for 20X1, 20X3, and 20X4 smaller in Requirement #3 than in the Basic Illustration even though Book Income Before Tax is identical? Again, your answer must be 30 words or less! 3 - Why is Income Tax Payable for 20X1 a total of $6,600 less for Requirement #3 compared to the Basic Illustration ($11,660 - $5,060 = $6,600)? Your answer should be in the form of a mathematical proof as to what is causing the $6,600 difference. 4 - WHY (i.e., what caused) the effective tax rate to be 30.05% in 20X3 rather than 33.00%? Be sure your calculation shows how the 30.05% is determined - this does NOT mean your answer is \"you divide Income Tax Expense by Book Income Before Tax\". The \"issue\" to address is WHY it is 30.05% rather than 33.00%. Your answer should be in the form of a mathematical explanation of what is causing the 2.95% difference. REQUIREMENT #4 Use the information from the Basic Illustration EXCEPT that an $85,000 Net Operating Loss (NOL) was incurred in 20X2 rather than the $82,000 income in the Basic Illustration. Income in 20X3 was also different than the Basic Illustration - assume $99,000 rather than $84,000. The tax rate for each year is to again 33%. Calculation of DIT NBV - T/R - Table 2 NBV - F/S - Table 3 depreciation difference Cumulative DIT x 33% or decrease in DIT 20X1 20X2 20X3 20X4 243,3 33 288,0 00 149,9 88 216,0 00 79,98 8 144,0 00 660 33,31 5 72,00 0 8,358 20X3 99,00 0 2,000 20X4 86,00 0 --- Calculation of Income Tax Payable 20X1 20X2 Book Income 80,00 20X2 NOL carry ----forward depreciation diff 5> Taxable Income or 35,33 ** 3 45> 20X2 NOL carry back --- 35,333 Taxable Income or 35,33 ** 3 2> Income Tax Payable 11,66 --0 Deferred NOL Asset 23,434 Journal entry (debit and ) 20X1 20X2 Income Tax Exp 26,40 0 50> Income Tax 11,66 Receivable 0 Deferred NOL 23,43 Asset 4 DIT 4> 29,98 8 --29,98 8 9,896 25,32 7 111,3 27 --111,3 27 36,73 8 20X 5 -0-0-0-012,7 66 20X5 Total 88,00 268,00 0 0 --- 38,68 --5 126,6 196,98 85 8 --- 35,333 126,6 232,32 85 1 41,80 100,10 6 0 20X3 32,67 0 20X4 20X5 28,38 29,040 0 660 8,358 12,766 Income Tax Payable Book Income Before Tax effective tax rate 80,00 0 33.00 % -- 33.00 % 99,00 0 33.00 % 06> 86,00 88,000 0 33.00 33.00 % % In the spaces provided below you are to answer the following questions - 1 - WHY are the journal entry debits and credits to DIT exactly the same in Requirement #4 for all five years as they were in the Basic Illustration? Your answer must be 30 words or less! 2 - EXPLAIN (using dollar amounts and identifying labels) what the firm did with the $106,345 Tax Loss (NOL) from 20X2. 3 - With Book Income Before Tax of $99,000 in 20X3, how much net Cash did the firm actually pay (or receive from) the IRS in 20X3? REQUIREMENT #5 Sullivan Inc. has a total book income, before tax, of $600,000. Included in total income was a net gain $50,000. The net gain includes operations till the sale date $80,000 and the loss on disposal $30,000 from discontinued operations. The current tax rate is 30%. Record in the space a partial income statement, in proper form, beginning with \" income from continuing operations before tax\" through \"net income.\" Use intraperiod tax allocation